On September 9, 2024, the Ministry of Corporate Affairs (MCA) introduced significant amendments to the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. These changes, effective from September 17, 2024, aim to simplify the compliance process for reverse flipping—a practice where a foreign holding company with an Indian subsidiary relocates its business back to India by merging with or amalgamating into its Indian entity.
Reverse Flipping: What It Means for Startups?
With India rapidly gaining traction as a preferred hub for startups, many businesses that initially shifted their holding companies abroad are now exploring options to relocate their operations back to India. This growing trend of reverse flipping is becoming increasingly common, especially as India strengthens its position in the global startup ecosystem.
Recognizing the need to streamline the process, the MCA has amended the rules to provide clear and efficient compliance guidelines for companies looking to reverse flip. By removing bureaucratic bottlenecks, the government is encouraging more businesses to return to India and enjoy its burgeoning startup environment.
Key Highlights of the Companies Amendment Rules, 2024
Previously, companies involved in reverse flipping had to secure approval from the National Company Law Tribunal (NCLT)—a process that often led to delays due to the NCLT’s heavy workload. To expedite the process, the MCA has introduced amendments that allow companies to fast-track their mergers and amalgamations under Section 233 of the Companies Act, 2013.
A major feature of these amendments is the introduction of sub-rule 5 under Rule 25A, which simplifies the process for foreign companies merging with their Indian subsidiaries. Now, a foreign holding company can merge with its Indian subsidiary after obtaining prior approval from the Reserve Bank of India (RBI), bypassing the need for NCLT approval.
Simplified Process for Reverse Flipping
The updated rules provide a streamlined procedure for companies looking to relocate to India:
1. RBI Approval: Both the foreign and Indian companies involved in the merger must first obtain approval from the RBI. This step is crucial to manage financial risks and ensure the integrity of the transaction.
2. Valuation Requirement: Before applying to the RBI, the Indian transferee company must conduct a valuation, performed by professionals who are members of a recognized professional body in the transferee company’s jurisdiction. This valuation must adhere to internationally accepted accounting and valuation principles, ensuring transparency. A declaration confirming compliance with these standards must be attached to the RBI application.
3. Application to the Central Government: Alongside the RBI application, the Indian transferee company must also apply to the central government under Section 233 and Rule 25 of the Companies Amendment Rules, 2024.
4. Special Clause for Companies from Bordering Countries: According to sub-rule 4 of
Rule 25A, if the foreign company is incorporated in a country that shares a land border with India, the company must submit a Form No. CAA – 16 when applying to the central government under Section 233. This ensures an added layer of scrutiny for such transactions.
